Kemper Cost Rises for Southern Company

By David Wagman

Denver, April 25, 2013 — Southern Company said the 582-MW Kemper County integrated gasification combined cycle power plant under construction for its Mississippi Power utility will cost as much as $333 million more than the $2.88-billion cost cap state regulators are allowing for the project.

The company said during an April 24 earnings conference call with analysts that the project remains on schedule to enter service in May 2014. It pinned the increased cost on an underestimation of the amount of piping needed in the project. The company said it is improving the quality of the piping, including its thickness and metallurgy. An overnight labor shift also was added to the project to help ensure it is completed on time.

The company also said on the call that it does not expect to add more gas-fired generating capacity across its multi-state system until 2023 at the earliest.

Tom Fanning, chairman, president, and CEO said that while the company is disappointed with the estimated cost increases at Kemper, “we continue to believe that the scheduled in-service date is achievable.”

Fanning said major challenges surround the process of “harmonizing the operation of the plant” through its instrumentation and control systems. That includes coordinating everything from the intake of lignite fuel to the gasification to the stripping out of the CO2 to the remaining synthesis gas going to the combined cycle units and producing electricity.

“Harmonizing the operation of the plant I think is probably what we are most focused on,” Fanning said. “Those start-up activities have been mostly focused on the combined cycle units, so the big effort is going to be start up around the gasifier and the carbon capture equipment.” The plant is expected to capture around 65% of its carbon emissions by 2016.

Fanning said the plant’s long-term variable operating cost is expected to be between $1 and $1.25 per million Btu. In terms of economic dispatch, he said Kemper “looks like a nuclear plant: High capital cost, cheap energy.” The plant‘s location at the mouth of a company-owned lignite mine will help dampen fuel price volatility.

Fanning also addressed recently rising natural gas costs. He said that units that combust coal from the Powder River Basin typically dispatch in the range of $3-$4/MMBtu. With gas prices at around $4.25/MMBtu that favors Southern’s Scherer and Miller generating stations.  Also, the company is moving away from firing coal sourced from Central Appalachian coal mines to coal from the Illinois basin. Units that fire Illinois basin coal start dispatching at around the $5/MMBtu range. Central Appalachian coal, by contrast, dispatches in the $6/MMBtu range.

At the end of March, all the Miller units and at least three of the Scherer units were dispatching ahead of Southern’s most efficient gas unit, the company said.

Fanning told analysts that Southern Co. likely will not need additional gas-fired generating capacity before 2023, based on an assumed 2% growth in gross domestic product and 1.3% growth in electricity sales.

He said additional capacity under construction at the Vogtle nuclear station, along with purchased power agreements from competitive generation providers, the addition of the Kemper station as well as power supplied by a solar initiative in Georgia, “will all speak to our needs through the end of this decade and perhaps into very early the 2020s.”